Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

On Friday, March 18, 2011, FINRA issued Regulatory Notice 11-12 entitled "FINRA Reminds Firms of Their Obligations Under the Foreign Corrupt Practices Act" (available here). The Notice, which provides a brief review of the FCPA, discusses the application of the Act's prohibitions to member firms.

As stated in the Notice, the FCPA not only makes it "unlawful to bribe foreign officials to obtain or retain business in a foreign country," but "[t]he accounting provisions generally require each company considered to be an 'issuer' under the FCPA to make and keep books and records that accurately and fairly reflect the company’s transactions and to devise and maintain an adequate system of internal accounting controls."

The Notice advises firms "to review their business practices to ensure they are complying with all of their obligations under the FCPA." The Notice further warns that a "member firm’s failure to comply with its FCPA obligations will be considered conduct inconsistent with high standards of commercial honor and just and equitable principles of trade in violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade)."

FINRA's Notice is just the latest statement reflecting the increased focus on FCPA enforcement. In remarks made in November 2010 (available here), Assistant Attorney General Lanny A. Breuer stated that firms had a "right to be more concerned," because "we are in a new era of FCPA enforcement; and we are here to stay." Last week, Mark Mendelsohn, the former Deputy Chief of the Fraud Section at DOJ, in an interview with the Wall Street Journal (discussed here) warned that the "rise in prosecutions of individuals … is a trend that is here to stay and will continue to grow."

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On Thursday, March 17, 2011, the Wall Street Journal published an interview (available here, log-in required) with Mark Mendelsohn, the former Deputy Chief of the Fraud Section at DOJ, whose responsibilities included enforcement of the Foreign Corrupt Practices Act ("FCPA").

Mr. Mendelsohn, who left DOJ in 2010 to join Paul Weiss, discussed the future of FCPA enforcement. Highlights of the interview included:

• "The Dodd-Frank whistleblower provision is going to significantly change the game and create large financial incentives for whistleblowers to come forward to the SEC. We're going to see even more reporting to the government both by companies looking to get ahead of the whistleblowers and by whistleblowers. It will be a real challenge for the SEC and DOJ to keep up."

• "The rise in prosecutions of individuals I think is a trend that is here to stay and will continue to grow especially as the Justice Department and the SEC have more resources at their disposal."

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On March 10, 2011, the Boston Consulting Group ("BCG") submitted a Report to Congress examining the internal operations, structure and need for reform at the SEC. As part of its work, BCG reviewed extensive documentation and conducted over 425 interviews. The Report (available here) recommended a series of initiatives designed to optimize the SEC's resources, but also recommended that Congress consider whether such improvements allow the Commission to meet congressional expectations. If not, Congress will either need to adjust the SEC's funding or change its role to fit available funding, the Report concluded. 

The Report, mandated by the Dodd-Frank Act, recommended that the SEC:

• reprioritize its regulatory activity, which would include focusing on activities that the Commission deems critical to commerce or to strengthen the SEC itself, scaling back or stopping activities, or delegating them to self-regulatory organizations ("SROs");

• reshape its organization by, among other things, taking into account the reprioritization described above and seeking flexibility on certain offices mandated by the Dodd-Frank Act;

• invest in enabling infrastructure, particularly in the area of information technology and human resources; and

• enhance its role as an overseer and co-regulator with SROs by strengthening its oversight of them and centralizing its contacts with them.

BCG noted however, that its recommendations would only take the Commission "so far," due to constraints its faces: notably civil service laws limit the ability of the agency to attract, retain and manage personnel. The Report noted that, even with these changes, the SEC may not be able execute upon all activities necessary. If so, Congress will need to either relax funding constraints or alter the SEC's role to fit its existing funding and rely more heavily upon the SROs to fill regulatory needs.

In recent congressional testimony, the SEC sought additional funding to be able to fulfill its role. SEC Chairman Mary Schapiro testified on Thursday (March 10) before a Senate Committee and today (March 15) before a House Subcommittee in support of the Administration's proposed budget for Fiscal Year 2012, which seeks $1.4 billion for the SEC (an increase over the $1.2 billion sought Fiscal Year 2011). In a separate statement, she welcomed the BCG report and was pleased that it recognized "the many initiatives we have taken over the past two years to increase the agency's efficiency and effectiveness." However, she acknowledged that "there is more work to be done."

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On March 10, 2011, Cornerstone Research announced the results of its latest study: "Securities Class Action Settlements – 2010 Review and Analysis." The Annual Report, which provides detail on settlement summary statistics and an analysis of case characteristics, reviewed the 86 court-approved settlements in 2010, finding that the number of settlements fell to its lowest in ten years and that the total dollar value of settlements fell 17%. However, the median settlement amount increased over 40% in 2010.

One of the co-authors of the report, Professor Laura Simmons of the College of William & Mary, stated in the Press Release: "I don’t expect the sharp drop in the number of settlements to reoccur in the near future; however, the broad-based shift toward higher settlement amounts may persist in upcoming years."

Additional findings announced by Cornerstone include:

• settled cases where there was a corresponding SEC action prior to the class action settlement increased to 30% in 2010 (compared to 20% in 2009), and those cases tend to result in higher settlement amounts;

• the number of class actions involving companion derivative actions fell slightly in 2010 when compared to 2009, but still remain higher than the average number of cases since the passage of the Private Securities Litigation Reform Act; and

• approximately 70% of the settlements announced in 2010 were related to violations of generally accepted accounting principals (a 5% increase over 2009) and those cases "continued to be resolved with statistically significant larger settlement amounts" than cases that did not involve GAAP violations or accounting issues.

Cornerstone's Press Release regarding the study is available here.  The Study itself is available here.

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